Greece And The IMF: That Wikileaks Release Is Pretty Much What We All Knew Anyway

Or rather, the supposedly shocking release by Wikileaks of an
IMF conversation about Greece and the debt crisis is pretty much what we all should have known all along. Because it's really just a restatement of the basic set up of the Troika in the first place. The IMF is there to reassure the more nervous members of the Eurozone that the EU itself, or the Commission, won't be able to just cave in in order to smooth over any idea of a crisis about the debt or the euro. That's why those more nervous members insisted that the IMF must be involved. The IMF is insistent that any long term solution to the Greek problem itself must involve debt relief: and not just extension of terms but a cut in the headline debt. That's the bit that the EU and the Commission cannot stomach. It's rather a circle that people are trying to square here but that is the basic dynamic. The IMF is correct about the debt itself: debts that cannot be repaid will not be repaid and it's best to acknowledge that upfront. The politicians cannot acknowledge that for to do so would be an admittance that they have wasted their own taxpayers' money on bailing out Greece (almost all of the debt is owed to some combination of the eurozone governments, the ECB which is owned by the eurozone governments and so on).

Thus these revelations are not in fact surprising: they're what informed observers have been saying has been happening all along:

According to the WikiLeaks transcript, the two IMF officials discuss an “event” that would force the Europeans to accept the IMF’s position so the bailout review can be concluded.

“What is going to bring it all to a decision point? In the past there has been only one time when the decision has been made and then that was when they were about to run out of money seriously and to default. Right?” Thomsen is claimed to have told Velculescu.

According to the internal discussion, the IMF is planning to tell Germany that it will abandon the Troika (composed of the IMF, European Commission and the European Central Bank) if the IMF and the Commission fail to reach an agreement on Greek debt relief.

Thomsen: "Look you, Mrs. Merkel, you face a question: you have to think about what is more costly, to go ahead without the IMF--would the Bundestag say 'The IMF is not on board?', or [to] pick the debt relief that we think that Greece needs in order to keep us on board?"

Remaining in the Troika seems an increasingly hard sell internally for the IMF, because non-European IMF creditor countries view the IMF's position on Greece as a violation of its policies elsewhere of not making loans to countries with unsustainable debts.

In August the IMF announced it would not participate in last year's €86 billion Greek bailout, which was covered by EU member states. IMF Chief Christine Lagarde stated at the time that the IMF's future participation was contingent on Greece receiving "significant debt relief" from creditors.

The background here is, in economic terms, very simple. It's the politics that make it difficult. Greece owes more money than it can pay. The solution is to cut the amount of money that Greece must pay therefore. This is the standard IMF solution to such problems, it is the standard rational solution to such problems. Thus the IMF is advocating a cut in the debt burden, entirely sensibly. Thus, also, the IMF's refusal to join the Troika unless a debt haircut was somewhere in the plans. And the general agreement was that yes, this would be discussed at some future date when Greece had lived up to the first few pieces of reform.

This is some future date: thus the discussion of a cut in the debt. Simple enough economics.

Which is where the politics comes in. The general view among observers is that the EU, the Commission, the European Central Bank, they were willing to just carry on hoping that something would turn up. The integrity of the euro itself, of the European Project, was much more important than what happened to one small economy or the people of that economy. Thus not all that worried about the IMF involvement. But, crucially, also not willing to countenance a cut in the total debt amount. As almost all of the debt is owed to official creditors such a cut would, or could, be seen as a failure by those very same European grandees and authorities. Thus a policy of papering over matters, extending terms, reducing interest rates and, crucially, just plain flat out hoping something would turn up.